1. Mutual Funds and Hedge Funds
Services of Investment Companies
Types of Investment Companies
Types of Mutual Funds
Cost of Mutual funds
Return of Mutual Funds
Exchange Traded Funds
Hedge Funds and Their strategies

2. Services of Investment Companies
Administration & record keeping
Diversification & divisibility
Professional management
Reduced transaction costs

3. Net Asset Value
Used as a basis for valuation of investment company shares
Selling new shares
Redeeming existing shares
NAV=
Market Value of Assets - Liabilities
Shares Outstanding

4. Types of Investment Organizations
Unit Trusts
Managed Investment Companies
Open-End
Closed-End
Other investment organizations
Commingled funds
REITs
Hedge Funds

5. Open-End and Closed-End Funds
Shares Outstanding
Closed-end: no change unless new stock is offered
Open-end: changes when new shares are sold or old shares are redeemed
Pricing
Open-end: Net Asset Value(NAV)
Closed-end: Premium or discount to NAV

6. Investment Policies Money Market Equity Specialized Sector Bond
Balance & Income
Asset Allocation
Indexed
International

7. Costs of Investing in Mutual Funds
Fee Structure
Front-end load
Back-end load
Operating expenses
12 b-1 charges
distribution costs paid by the fund
Alternative to a load
Fees and performance

8. Example
An open-end fund has a total asset of $120 million and a liability of $10 million. It has 10 million shares outstanding. What is its NAV? It is sold with a front-end load of 5%. What is its offering price?

9. Fund Returns
Page 106

10. Table 4.2 Impacts of Costs on Investment Performance

11. Exchange Traded Funds
ETF allow investors to trade index portfolios like shares of stock
Examples - SPDRs and Webs
Potential advantages
Trade continuously
Lower taxes
Lower costs
Potential disadvantages

12. First Look at Mutual Fund Performance
Average mutual fund performance is generally less than broad market performance
Over certain horizons there is persistence in positive performance
Evidence is not conclusive
Some inconsistencies

13. Figure 4.3 Diversified Equity Funds versus Wilshire 5000 Index

14. Sources of Information on Mutual Funds
Wiesenberger’s Investment Companies
Morningstar (
Yahoo (biz.yahoo.com / funds)
Investment Company Institute (
Popular press
Investment services

15. Hedge Funds vs. Mutual Funds
Transparency: Limited Liability Partnerships that provide only minimal disclosure of strategy and portfolio composition
No more than 100 “sophisticated”, wealthy investors
Transparency: Regulations require public disclosure of strategy and portfolio composition
Number of investors is not limited

16. Hedge Funds vs. Mutual Funds
Investment strategy: Very flexible, funds can act opportunistically and make a wide range of investments
Often use shorting, leverage, options
Liquidity: Often have lock-up periods, require advance redemption notices
Investment strategy: Predictable, stable strategies, stated in prospectus
Limited use of shorting, leverage, options
Liquidity: Can often move more easily into and out of a mutual fund

17. Hedge Funds vs. Mutual Funds
Compensation structure: Typically charge a management fee of 1-2% of assets and an incentive fee of 20% of profits
Compensation structure: Fees are usually a fixed percentage of assets, typically 0.5% to 1.5%

18. Hedge Fund Strategies Directional
Bets that one sector or another will outperform other sectors
Non-directional
Exploit temporary misalignments in relative valuation across sectors
Buy one type of security and sell another
Strives to be market neutral

19. Table 26.1 Hedge Fund Styles

20. Statistical Arbitrage
Uses quantitative systems that seek out many temporary and modest misalignments in prices
Involves trading in hundreds of securities a day with short holding periods
Pairs trading: Pair up similar companies whose returns are highly correlated but where one is priced more aggressively
Data mining to uncover systematic pricing patterns

21. Portable Alpha Invest wherever you can find alpha.
Hedge the systematic risk of the investment to isolate its alpha.
Establish exposure to desired market sectors by using passive products such as indexed mutual funds or ETFs.
Transfer alpha from the sector where you find it to the asset class in which you ultimately establish exposure.